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Investors cancel the 'apocalypse' and make a hard pivot in August: Morning Brief

·Anchor/Reporter
·4 min read

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Wednesday, August 17, 2022

Today's newsletter is by Brian Cheung, an anchor and reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

The last two months have been a welcome rebound for stock market investors who endured a brutal first half of the year.

Declining oil prices and optimism over an improving picture on inflation — which would tame the Federal Reserve’s pace of rate hikes — appear to have supported the bounce-back between July and August.

After losing about 24% through the first five and a half months of the year, the S&P 500 has rebounded 17% from its lows in mid-June. Other pockets of the market have showed signs of improvement as well — longer-term bond yields retreated from their post-COVID highs, and the VIX, known as the "fear index," dipped back to levels not seen since earlier in the year.

Oppenheimer Head of Technical Analysis Ari Wald said the stock market appears to be showing signs of a market bottom. Wald told Yahoo Finance Live on Tuesday mid-June showed a “washed out” market, with only 14% of companies on the New York Stock Exchange trading above their 200-day moving averages. The 200-day is a closely-watched indicator that broadly tells you if a security's long-term trend is up or down.

“That is consistent with capitulation, that is a full surrendering of the markets,” Wald said.

Headlines in July supported an easing picture on inflation, advancing the market recovery. Lower oil prices supported an inflation report showing no price increases between June and July.

And Bank of America Global Research’s latest monthly survey of fund managers released Tuesday showed big money investors moving marginally back into stocks between July and August.

BofA's monthly survey of 284 fund managers (representing $836 billion in assets under management) showed strong repositioning between July and August into stocks. (Source: BofA Global Fund Manager Survey)
BofA's monthly survey of 284 fund managers (representing $836 billion in assets under management) showed strong repositioning between July and August into stocks. (Source: BofA Global Fund Manager Survey)

“Sentiment remains bearish, but no longer apocalyptically bearish as hopes rise that inflation and rates shocks end in coming quarters,” BofA strategist Michael Hartnett said in the report.

Nonetheless, BofA’s survey showed fund managers still positioned defensively, leaning heavily on cash and away from riskier assets like stocks. Taken together, this surge of buying last month still shows investors are far from max bullishness.

When compared against average positioning over the last 10 years, investors remained overall long cash and underweight equities. (Source: BofA Global Fund Manager Survey)
When compared against average positioning over the last 10 years, investors remained overall long cash and underweight equities. (Source: BofA Global Fund Manager Survey)

All of which results in an interesting dynamic wherein investors are trying to figure out not only how to time an entry back into the market, but which stocks, sectors, and assets to buy while doing so.

For some clues on this struggle, we need look no further than the hedge funds, where big names are all over the place on positioning.

Regulatory disclosures this week showed how George Soros and his mentee, Stanley Druckenmiller, took completely different approaches to equities in the three months through June.

Whereas Druckenmiller dumped his family office’s stake in Amazon (AMZN), Soros took on a larger stake in the company. During the second quarter, Amazon shares fell 34%.

And this divergence continues to be fueled by questions about the inflation story and, in turn, the future direction of Fed policy.

Although the July inflation report showed signs of improvement, prices remain 8.5% higher than they were a year ago — still well above what Fed Chair Jerome Powell would like to see. Which suggests the central bank will continue to raise interest rates to dampen economic activity. A move that, all else equal, should challenge stocks.

And yet the rebound in markets clearly points to questions from investors over the Fed holding its nerve. And, further, suggests investors have serious doubts about the Fed's recent indications additional aggressive rate hikes will be needed.

Though BofA's report suggests maybe investors didn't need much cajoling to get more excited about stocks, and a view on the Fed needn't be so meticulously thought out.

Perhaps all was needed for investors to start buying again was a retreat from seeing conditions as "apocalyptic." A bar it appears has been met.

What to Watch Today

Economic calendar

  • MBA Mortgage Applications, week ended August 12 (0.2% during prior week)

  • Retail Sales Advance, month-over-month, July (0.1% expected, 1.0% during prior month)

  • Retail Sales excluding autos, month-over-month, July (-0.1% expected, 1.0% during prior month)

  • Business Inventories, June (1.4% expected, 1.4% during prior month)

  • FOMC Meeting Minutes

Earnings

  • Lowe’s (LOW), Amcor (AMCR), Analog Devices (ADI), Bath & Body Works (BBWI), Cisco Systems (CSCO), Krispy Kreme (DNUT), Performance Food Group (PFGC), Synopsys (SNPS), Target (TGT), The Children's Place (PLCE), TJX Companies (TJX), Wolfspeed (WOLF)

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